GLOBAL TRADE: Leading Americans force a rethink on globalism

by Patrick J. Byrne

News Weekly, June 23, 2007

High-level US business leaders and economists want the globalism policies of the US curbed before 30-40 million jobs go offshore and the US standard of living declines. Patrick J. Byrne reports on a debate that is yet to get underway in Australia.

A recent Wall Street Journal/NBC News poll found only 35 per cent of those with at least a four-year college degree believed "that the US is benefiting from the global economy". Yet these are the people expected to benefit most from economic globalisation.

Now business leader and economists are recognising the problem. Alan S. Blinder is professor of economics at Princeton University and vice-chairman of the G7 Group. He now calls himself a "free trade apostate", much to the dismay of many of his fellow economists.

Writing in The Washington Post (May 6, 2007), Blinder says that the nature of international trade is changing before our eyes. First, the march of information and communications technology is such that "a widening array of services will become deliverable electronically from afar. And it's not just low-skill services such as key-punching, transcription and telemarketing. It's also high-skill services such as radiology, architecture and engineering - maybe even college teaching."

Move offshore

Second, about 1.5 billion "new" workers are entering into the world economy from China, India and the states of the old Soviet Union. Soon they will have a highly educated, professional workforce numbering hundreds of millions, and capable of competing with their Western counterparts for a fraction of a Westerner's salary. "So there will be a lot of willing and able people available to do the jobs that technology will move offshore."

Blinder says that, by his calculations, between 30 and 40 million US jobs have the potential to be outsourced overseas. He says that reasonable predictions can be made as to which jobs will stay onshore and which outsourced: "Many electronic service jobs will move offshore, whereas personal service jobs will not. Here are a few examples.

"Were it not for stiff regulations, radiology would be offshorable; but pediatrics and geriatrics aren't. Lawyers who write contracts can do so at a distance and deliver them electronically; litigators who argue cases in court cannot."

Blinder emphasises the need to boost education and R & D to keep the US ahead in technology, innovation and entrepreneurship, so that the US doesn't get locked into sunset industries. However, he admits that this alone won't solve the problem of tens of millions of American workers facing a "troublesome transition" from old to new industries.

Blinder's apostasy follows on the creation of the Horizon Project by some powerful US business leaders (see www.horizonproject.us). The project aims to educate US politicians as to how the old Adam Smith and David Ricardo free trade principles have to be modified to fit a global economy differently structured to anything seen before.

Backing the project are people like Alfred Berkley III, former NASDAQ president; Leo Hindery jnr, project chairman and former CEO of the YES Network and AT&T Broadband and Telecommunications; and Ralph Gomory, a former senior vice-president of IBM.

Ralph E. Gomory and the former president of the American Economic Association, William Baumol, co-authored a seminal book on the issue, Global Trade and Conflicting National Interests.

In a long interview with The Nation (April 30, 2007), Gomory says he is haunted from his experience helping to expand IBM's global presence and outsourcing of high-tech jobs worldwide. He says that the Horizon Project is important to correcting the deeper fallacies of classical free trade theory.

Despite Gomory's heretical views matching those of Blinder, his critique has serious political potential. It provides what the opponents of corporate-led globalisation have generally lacked: a comprehensive intellectual platform for arguing that the US approach to globalisation must be transformed to account for the diverging interests between US corporations and the national interest.

Gomory says that those who argue that free trade is destroying American workers' jobs are routinely told by free trade advocates that the US can maintain its technological edge by investing in more education and R & D. This will create new high-paying jobs to replace the jobs being lost. Economists call the destruction of old industries, to be replaced by new ones, "creative destruction".

He replies pointing out that the issue is not about creating new technologies but accounting for where the new technologies and their industries are located around the globe. Given the global nature of corporations, new American technologies may well be applied to build new industries in China or India - not in the US, as was once the case.

The rapid advancement in communications technologies, transportation and the global nature of many corporations has meant that, frequently, the latest technologies are being invested in low-wage countries. The new emerging economies know this and offer corporations an array of incentives, alongside low wages, that will give corporations high profits in exchange for setting up operations in their country. No longer is Cold War politics an impediment to Western corporations investing in countries such as China and Russia.

Indeed, these emerging economies have understood that there is a growing divergence between what corporations want and what nation-states want, and have exploited this to their benefit and the detriment of the US.

Consequently, US workers will be increasingly exposed to downward pressure on incomes and living standards. Gomory says that he is asked: is it so bad that "Americans become less rich, others in the world become less poor"?

That may be a reasonable outcome, he says, but that isn't what people in the US were told would happen. Americans were told that free trade would produce a win-win for the developing and the developed world; that a rising tide would lift all boats; and that "in the long run, we're going to get richer with globalisation". Now they are being told that the average American is going to be worse off.

Accumulating loss

Gomory and Baumol are making economists and political leaders rethink. They describe how the losses being experienced in the US are not confined to workers in particular industries in particular areas. Rather, the accumulating loss of industries is damaging the country's productive base and, in time, will damage everyone's economic well-being.

America's economic plight is seen in its massive trade deficits, which are now over 7 per cent of gross domestic product annually. The US is literally exporting industries to China and other low-wage nations, then borrowing from China and Japan to buy back the goods these countries now produce in place of the US. This borrowing allows the US to temporarily mask over its weakened economic situation and artificially maintain its living standards.

However, the US will face its day of reckoning. Then Americans will be forced to cut consumption to pay off their foreign debt. The longer the current situation continues, the deeper will be their debt, the more weakened their economy and the more painful will be their repayments. Meanwhile, the industrial strength of the emerging economies will have grown at the expense of the US.

Gomory says that the problem now facing the US is a domestic political problem that can only be solved in Washington. Beijing, Moscow and New Delhi are pursuing their respective national self-interests, and US corporations are pursing their corporate self-interests - i.e., maximising their profits.

There are two key elements to Gomory's solution for the US.

First, Washington must apply the World Trade Organization mechanisms that allow a nation like the US, which has a dangerously high foreign debt, to cap the nation's swollen trade deficit. The trade deficit has to be wound back until the US has achieved a balance of trade with its trading partners. These emergency mechanisms have never been invoked by a first-world nation, much less the world's biggest economy.

This dramatic step would have wrenching consequences on the world economy, but could drive America's trading partners to reform their trading systems. Gomory believes that this reform should involve enforcing international standards on workers' rights.

Second, the US should apply a tax penalty on those corporations that move high-wage jobs and high-valued production offshore. Conversely, tax incentives should be given to companies which continue investing in the redevelopment of the US economy. He believes the tax system should be used to shape corporate investment decisions so that they pursue profits in a different way.

Gomory says that the US needs to recognise that other developed nations use sophisticated industry policies, as well as political and cultural pressures, to force multinationals to act not only in their own interest, but also in the interest of the nation. In this way, Gomory hopes to resurrect the old notion of the corporation's obligation, first to shareholders, but also to society.

The two key policies Gomory suggests - balancing trade and disciplining multinationals to act in the national interest - have to work together; and they have to be applied simultaneously in order to work.

Ralph Gomory and the Horizon Project may differ in their solutions to that proposed by Alan Blinder. However, they have a shared concern that the changed dynamics of the world economy have left the old theories of free trade seriously deficient.

Hence, Professor Blinder says that the new globalised economy will put "great political strains on the open trading system as millions of white-collar workers who thought their jobs were immune to foreign competition suddenly find that the game has changed - and not to their liking".

He concludes: "That is why I am going public with my concerns now. If we economists stubbornly insist on chanting 'Free trade is good for you' to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome."